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For Bond Buyers, Illinois is “Problem State” Until Pension Limbo Resolved

Illinois has been in a state of pension limbo since July, when a state Supreme Court ruling on healthcare premiums hinted that the state’s pension reform law would be struck down by the courts.

Now, bond buyers are watching closely how the Supreme Court rules on the state’s pension reform law – but until then, investors are marred in “uncertainty” and are calling Illinois a “problem state”.

From The Street:

Municipal debt investors are watching the appeals process that will decide whether or not the State of Illinois’ pension reform bill ends up in the wastebasket, which would send the Land of Lincoln back to square one in its attempts to battle its pension funding crisis.

“There’s so much uncertainty there,” Daniel Solender, the lead portfolio manager for municipal bonds at investment manager Lord Abbett & Co., said by phone Wednesday. “It’s hard to know what the right valuation is [for the state’s bonds].”

So far, investors are waiting and watching. Solender noted that there hasn’t been much trading in Illinois’ bonds in response to a Nov. 21 Circuit Court decision that said the reform bill was unconstitutional. If the Illinois Supreme Court upholds that decision, Solender expects a negative effect on the state’s bond values.

“For investors to get comfortable, there has to be some idea of a plan [for pension reform], and there doesn’t seem to be one [now],” he said.

Still, he is confident that Illinois has time to work out its pension issues one way or another.

Solender and other sources are looking optimistically to Governor-elect Bruce Rauner, a Republican, to address the issue. Rauner will replace Pat Quinn, a Democrat, on Jan. 12.

Illinois’ unfunded pension liability has ballooned to $111.2 billion, according to a November report by the Illinois Commission on Government Forecasting and Accountability. The Teachers’ Retirement System accounts for about half of that at $61.6 billion, the report said.

A June 24 report by Standard & Poor’s revealed that Illinois has, by far, the lowest level of pension funding in the country at 40.4% funded, followed by Connecticut (49.1%).

As part of a Dec. 1 panel in New York City that discussed municipal debt restructuring, William A. Brandt Jr., president and CEO of Development Specialists Inc., said that Illinois holds 43% of the public pensions in the U.S. According to Brandt, who is also the chair of the Illinois Finance Authority, those amount to some 652 public pensions.

“Illinois is your problem state,” he warned.

Moody’s gives Illinois’ credit an A3 rating – the lowest of any state.

Pension Funds Sue Chris Christie Over State Contribution Cut

New Jersey’s three largest pension funds filed a lawsuit against New Jersey Gov. Chris Christie on Wednesday for slicing the state’s required pension contribution by $900 million in 2014.

The complaint can be read here.

Illinois Supreme Court Expedites Pension Reform Appeal

The Illinois Supreme Court on Wednesday complied with a request by Illinois Attorney General Lisa Madigan to fast track the hearing over the state’s pension reform law, which a lower court found unconstitutional.

From Reuters:

The court ordered public labor unions and retiree groups challenging the law and the state to file their briefs in January and February with oral arguments to be scheduled in March. Illinois Attorney General Lisa Madigan had asked the court last week to speed up the appeal process.

The state asked for oral arguments as early as Jan. 22 and no later than March 10 to enable Illinois’ upcoming budget to incorporate about $1 billion in cost-savings under the law, or adequate spending cuts or tax increases to offset those savings.

The pension reform law was supposed to go into effect on June 1 but was put on hold by Sangamon County Circuit Court Judge John Belz in May pending his Nov. 21 ruling in five consolidated lawsuits. The state’s new fiscal year begins July 1 and the legislature usually passes a budget by May 31.

The law’s opponents asked the supreme court on Tuesday not to speed up the case.

The law raises retirement ages and suspends COLAs for some workers, and makes state contributions to the pension system enforceable by the Illinois Supreme Court.

Urban Institute Launches Public Pension Tool – “Build Your Own Pension Plan”

The Urban Institute has released its “Build Your Own Pension Plan” tool, which allows users to construct and analyze the costs and benefits of self-made pension plans.

The tool, outlined by Pensions & Investments:

State and local governments dealing with pension challenges can use a new tool from the Urban Institute in Washington to model possible changes.

The independent think tank released on Tuesday the interactive tool, “Build Your Own Pension Plan.”

As part of its Public Pensions Project, the Urban Institute also has a pension report card that grades states on pension funding, retirement security for both short-term and long-term employees, and workforce incentives.

New approaches like cash balance plans and offering annuities for public-sector workers score well on the report card, said Richard Johnson, senior fellow and program director for retirement policy at the Urban Institute. While they don’t solve current underfunding woes, “they represent the kind of bold thinking needed to address the pension challenges confronting state and local governments. There are better ways of reforming pensions that can provide public servants with secure retirements and still save taxpayers money,” Mr. Johnson said in a statement.

Use the tool here.

Photo by Michael Scott via Flickr CC License

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

_________________________________

By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

OECD Report: Longer Life Expectancy Threatening Pension Sustainability; More Reforms Needed

The Organization for Economic Cooperation and Development released a report Monday morning highlighting the challenges that longer life expectancy poses to pension systems around the world.

From CNBC:

The world’s retirement bill is coming due—and many countries aren’t ready to pay it.

That’s the conclusion of a report Monday from the Organization for Economic Cooperation and Development, a Paris-based group representing the world’s developed countries.

With populations aging and lifespans rising, government-supported pensions are cutting deeper into national budgets, crowding out spending on other programs and services. The added burden comes as the economies of the developed world are growing slowly, putting added pressure on the tax revenues needed to pay rising pension costs.

[…]

“The ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms,” OECD Secretary-General Angel Gurría said. “We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”

The report acknowledges numerous pension reforms by countries and states in recent years, but says more needs to be done. The report presented a handful of reform proposals. From the OECD:

Increasing the effective retirement age can help but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.

Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrolment programs have been successful in raising coverage in the countries that have implemented them.

The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.

Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.

Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.

Rebuilding trust is also an important challenge that policy makers face, says the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.

The full OECD report can be read here.

Photo by Horia Varlan via Flickr CC License

Pennsylvania Lawmakers: Municipal Pension Reform Needed

Two Pennsylvania state Representatives – Rep. Seth Grove (R) and Rep. Keith Greiner (R) – have penned a column on Lancaster Online arguing for the reform of municipal pension systems.

Specifically, they argue for reforms that would remove pension negotiations from the collective bargaining process and would transfer new hires into a cash balance plan.

Grove and Greiner explain:

Gambling with pension funds needs to end by both local governments and employee unions. Pension negotiations need to be permanently removed from the collective bargaining process to ensure that our police and firefighters are not at risk of having their pensions destroyed, and taxpayers aren’t put on the hook because of short-term and short-sighted decisions.

These two fixes are both long-term solutions, but what can we do in the short term? The answer is change the pension benefit structure for new hires to a cash balance pension plan. A short-term solution will require new revenue to reduce the unfunded liability. A cash balance plan allows municipalities to use excess stock market earnings to pay off the unfunded liability.

Instead of raising taxes or creating new taxes, this allows the pension plan to fund itself. The cash balance concept also has long-term taxpayer protections built in. New hires will have their own accounts, just like a 401(k), which allows them to transfer their retirement between jobs and ensures taxpayers are not on the hook for future underfunding of pensions.

It also provides employees with the ability to take their retirement by monthly payments, which is just like a traditional defined benefit plan. And since a cash balance pension concept is considered a defined benefit pension plan by IRS guidelines, you can still combine pension funds together and ensure you do not underfund the old pension systems. Lastly and most importantly, it will not affect our current public safety personnel’s pensions, but will ensure that new hires will still receive a good pension, which they deserve.

We do not want to honor the dedication and service of public safety personnel by putting them in the poor house after retirement. However, we also do not want to shift costs from pensions to welfare.

Ultimately, these changes are actually about hiring more police and fire personnel and protecting the pensions of current police and fire personnel.

Furthermore, the changes are about ensuring that all municipalities across Pennsylvania are financially stable and that commuter taxes go away. There are tremendous upside benefits to all stakeholders.

Read the entire piece here.

Jacksonville Will Vote On Pension Reform Measure This Week

After months of debate, the Jacksonville City Council could approve this week a measure to reduce the city’s pension debt.

Observers say the measure, which would increase city pension contributions, change retiree COLAS and give the Council the right to change benefits, has the votes needed to pass through the Council.

From the Florida Times-Union:

The full council will meet Tuesday and could take a vote on the legislation.

Thirteen council members — more than a necessary majority for passage — voted last week in favor of the bill during two committee meetings after making several changes they said make the agreement a financially better deal for taxpayers.

After years of failed attempts to reform the police and fire pension and reduce the city’s $1.65 billion debt obligation to it, council members appear close to passing a bill that Brown’s administration says will save the city $1.2 billion over a 30-year period.

“I suspect there will be limited discussion on it, and I suspect the vote will be significantly in favor, maybe even an unanimous vote,” said Councilman John Crescimbeni.

If the Council passes the bill, it will still need to be approved by the Police and Fire Pension Fund Board. There’s no guarantee they will accept the deal. From the Florida Times-Union:

The pension fund board is composed of five members. The police and firefighters union each appoint one member, the City Council appoints two members and the fifth member is chosen by the four other members.

Whether the board members pass the bill remains a major question, because it includes some significant differences from Brown’s original legislation that they supported.

Council amendments include changes to guaranteed annual cost-of-living adjustments that current police and firefighters will receive to their pensions and interest rates earned in their Deferred Retirement Option Program accounts. The council would also retain the power to impose pension benefit changes in three years if future collective bargaining talks reach an impasse.

When Brown negotiated his deal with the pension fund earlier this year, pension board members nixed the concepts now included in the council’s changes.

Officials from the mayor office told the council last month that any changes made to the deal could effectively kill it.

The reform measure would increase city contributions to the pension system by $40 million per year for the next 10 years. It would also change the way COLAs are calculated and would give the Council the right to change worker benefits for the next three years.

Photo by pshab via Flickr CC License

Illinois Asks Supreme Court to Fast-Track Pension Reform Hearing

Illinois’ Attorney General on Thursday requested that the state supreme court hold hearings on the state’s pension reform law as soon as January and no later than March.

From Reuters:

Attorney General Lisa Madigan filed a motion to accelerate the state’s appeal of a Nov. 21 Sangamon County Circuit Court judge’s ruling that the law aimed at easing Illinois’ huge pension burden violated protections in the state constitution for public worker retirement benefits.

“A prompt resolution of those issues is critical because the state must either implement the act, or in the alternative, significantly reduce spending and/or raise taxes,” the motion stated.

At stake is an approximately $1 billion cut in Illinois’ contribution to four of its pension systems in fiscal 2016 under the law. Republican Governor-elect Bruce Rauner, who takes office next month, has a Feb. 18 deadline to present a budget to the Democrat-controlled legislature, which has until May 31 to pass the spending plan with simple majority votes. A three-fifths majority vote on bills would be needed after that date to have a budget in place by July 1, the start of fiscal 2016.

[…]

The reform law was enacted in December 2013 to help save Illinois’ sinking finances. It reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits salaries on which pensions are based. Employees contribute 1 percent less of their salaries toward pensions, while contributions from the state, which has skipped or skimped on its pension payments over the years, are enforceable through the Illinois Supreme Court.

Illinois had $104 billion of unfunded pension liabilities at the end of fiscal year 2014.

Proposed New Jersey Bill Would Halt State Aid to Municipalities Not Complying With 2011 Pension Reforms

A New Jersey assemblyman proposed on Thursday a piece of legislation that would block state money to cities that aren’t complying with the state’s 2011 pension reform law.

From NJ.com:

[Assemblyman Declan] O’Scalon said he is proposing the legislation after reports surfaced that Newark had not been collecting payments that employees are legally required to pay toward their health care premiums.

Under the revised pension reforms Gov. Chris Christie signed in 2011, all public workers were required to contribute more toward its healthcare premiums, but state officials said earlier this year that Newark has not been compliant.

The city said in October that it took several months to update its payroll system in the wake of the law and that they did not know why the payments weren’t collected last year.

“It was long overdue, but it has come to light that the City of Newark has been ignoring the law since it was put into place,” O’Scalon said in a statement.

“The result is that the Mayor, Council members, and all employees in Newark pay less than the law requires – and worse, what common sense and fairness demand.”

The legislation would also dock the pay of elected officials and top finance department heads in municipalities that are not compliant, according to O’Scalon.

The proposed legislation would also establish noncompliance as grounds for impeachment or removal of the mayor of city officials, O’Scalon said.

O’scalon’s remarks arrive months after the state agreed to give Newark $10 million in transitional aid to address its budget crisis.

“Newark is a city that is facing tough issues and is legitimately going to need continued help from the state, but the local elected officials must lead by example,” O’scalon said.

The legislation will be officially introduced by the end of the year.

Photo credit: “New Jersey State House” by Marion Touvel. Licensed under Public domain via Wikimedia Commons

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